Yuan slips to lowest level since end of May

SHANGHAI: China's yuan extended a downward slide against the dollar on Tuesday, slipping to its weakest level since the end of May as the central bank allowed the midpoint to fall past the 6.8 level to the greenback.

In the past four trading days, the yuan has given back about a third of the sharp gains it made in late May and early June, when the central bank suddenly guided the exchange rate stronger by more than 1 percent and said it had changed the way it calculates its daily reference rate.

It remains up about 1.8 percent so far this year after losing about 6.5 percent last year.

The yuan's renewed weakness comes on the back of gains in the dollar since the start of the month.

The People's Bank of China set the midpoint rate at 6.8096 per dollar prior to the market open, weaker than the previous fix of 6.7972.

In the spot market, the yuan opened at 6.8214 per dollar and was trading at 6.8310 at midday, 95 pips away from the previous late session close and 0.31 percent away from the midpoint. The yuan last traded at this level on May 31.

The spot rate is allowed to trade within a range 2 percent above or below the official fixing on any given day.

Offshore, the yuan, also called the CNH, was also weaker.

One trader said strong dollar demand on Tuesday pulled the yuan down.

The weak midpoint, also the softest since May 31, was "the first real policy test for (the) counter-cycle fixing mechanism as dollar demand has significantly perked up and the CNH has been trading aggressively weaker this week," Stephen Innes, senior trader at OANDA, wrote in a note.

In late May the central bank said it was considering introducing a "counter-cyclical factor" to the way it calculates the yuan's daily midpoint fixing, a move analysts said appeared designed to give authorities more leeway to set the exchange rate as they saw fit, irrespective of market conditions.

Markets are still unsure what the new "x" factor is, but some analysts suspect it may only be employed when the dollar is firming in order to tamp down yuan depreciation pressure.

In a report on Tuesday in the state-run Financial News, Wang Yu, deputy head of the research bureau at the central bank, was quoted as saying there should be less intervention in the foreign exchange market and the yuan's trading band should be widened as next steps in exchange rate reforms.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.17, firmer than the previous day's 94.1.

The global dollar index fell to 97.517 from the previous close of 97.548.

The offshore yuan was trading 0.04 percent away from the onshore spot at 6.8338 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.995, -2.65 percent away from the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.